Why the Prediction I Got Wrong Back Then Is So Vital Today

By Michael Lombardi | Small Business

Why the Prediction I Got Wrong Back Then Is So Vital TodayBack in late 2011, I created a widely circulated video that included six predictions. I hit it on the head with five of those predictions. But the winners are not what are important to my readers today; it’s the prediction I didn’t get right that’s vital now

Back then, I said the U.S. dollar was “dead” and wouldn’t go anywhere. I pointed out that if it were not for the continued crisis in the eurozone, the greenback would fall flat on its face. The dollar hasn’t gone anywhere since. And if it were not for investors taking their money out of European banks and moving them into U.S. dollars, our dollar could have collapsed.

My second prediction back then was that the euro would decline in value. And it has. Prediction three was that both interest rates and inflation would rise. The yield on the 10-year U.S. Treasury has risen about 50% since then. As for inflation, if we calculate it the way the Consumer Price Index (CPI) was calculated when Jimmy Carter was president, it would be almost three times the rate the government tells us it is today.

I compared the rally in stocks that started in 2009 to the period following the 1929 stock market crash (1934 to 1937) and warned that stock prices would eventually follow the same fate they did after the “fake” stock market rally that followed the 1929 crash. I still have that opinion today.

What I got wrong in my “Critical Warning Number Six” was my prediction on gold bullion—and I believe that equates to a bigger opportunity for my readers today.

At the end of 2011, gold bullion was selling at $1,550 an ounce. Today, gold bullion prices sit at $1,280. So what’s happened to gold bullion, and what do you do if you bought gold stocks?

If you are into gold coins, you know the premium on them is at the highest level in memory. Demand for gold coins is going through the roof. Meanwhile, central banks are buying gold bullion at the quickest pace in years. Germany wants the gold bullion it keeps at the U.S. Fed back, but it can’t get it. So with all this demand, why have gold bullion prices fallen?

Yes, I’ve heard all the conspiracy theories that the Federal Reserve and major banks want gold bullion prices depressed. But I have no real first-hand proof of that. I’ve heard the manipulation accusations, but again I have no proof.

As a 30-year student of the markets and as an investor, I do know prices of any investment do not march straight up during a bull market. Nor do they go straight down during a bear market.

I started telling my readers to accumulate gold bullion-related investments when gold bullion traded under $300.00 an ounce (2001). Since then, gold bullion prices moved up to as high as $1,900 an ounce. The mid-point between those two numbers is $1,100.

If gold bullion prices fell decisively below $1,100 an ounce, I’d be worried. But in the light of all the demand for gold coins from the retail public and the gold bullion demand from the central banks, I’m not worried about gold. In fact, I see today’s current, depressed gold prices as a huge opportunity for investors to dollar cost average down with their gold investments. I know that’s exactly what I’m doing.

Years from now, I believe we will look back to 2013 and the low prices of gold stocks and say, “I should have bought more gold stocks back then.”

As the prices for gold bullion face severe headwinds in the short term, the fundamentals are getting stronger. The most important sign that makes me believe it is that central banks continue to buy more in spite of a sharp decline.

It’s not mentioned in the mainstream media very often, but central banks from countries like Russia, Turkey, and others have been continuously adding gold bullion to their reserves.

I wouldn’t be surprised to see these countries continue to buy even more as their currencies—their primary holdings—continue to become prone to wild swings. Have you seen the charts of the U.S. dollar, Japanese yen, Canadian dollar, and euro lately?

Consider this: From January 2011 to May 2013, the Russian central bank purchased gold in 22 of 25 months. Altogether, the Russian central bank has purchased 207.4 tons of gold bullion. (Source: World Gold Council web site, July 2013.)

The central bank of Turkey, which became a buyer in October 2011, has added 329.2 tons of gold bullion to its balance sheet for 16 of the 20 months since then. The central bank of Turkey has started to use gold as collateral. (Source: Ibid.)

Dear reader, you must keep in mind that central banks are very conservative investors and try to preserve their wealth. If they continue to buy gold bullion as the prices come down, it only tells me one thing—they like the precious metal’s future prospects.

As I always say, and it is very well documented in these pages, the central banks will never say when they are going to buy, but their actions are speaking louder than their words. Central banks have turned into net buyers as a whole—and have been buying large amounts quarter after quarter.

This shouldn’t go unnoticed because it’s significant—those who wanted to get rid of gold bullion will soon be running back to it.

It is unprecedented for a commodity to have a bull run like gold bullion has experienced over the last 12 years. I see the current decline as just another buying opportunity—a predictable and very normal part of the economy’s nature.

We are seeing many irrational sellers and speculators putting pressures on gold bullion prices, but what I do notice is that selling has calmed, and the remarks from the Federal Reserve have caused shorts some pain.